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Thursday, May 17, 2012

why rupee is falling ?( In simple words)

This post was written quite a long time ago, the latest compilation of reasons responsible for the falling rupee can be read here.

In December 2011, I had discussed an overview of factors responsible for the rupee depreciation against the dollar.
Again in simple words I shall discuss the aforesaid taking latest updates into consideration.

What is depreciation?

In late February, for 1 US dollar one could get 49.5 Indian Rupee but now for a dollar one can get 54.5 Indian rupees. This means rupee has been depreciated against the dollar and on the other hand US dollar has appreciated against the Indian Rupee.

Simply put, depreciating rupee means rupee is getting weaker. 

How this depreciation affect us?

In India we import almost 80 % of our fuel requirement and payment for the import is paid in dollars as dollar is the reserve currency of the world.
Suppose price of the crude is 100 US dollar per barrel. In February for a barrel of crude we had to pay Rs. 4950 but now rupee has been depreciated and we shall have to pay Rs. 5450.

This means crude has become more expensive for us due to weaker Rupee.
Due to this Indian government allows OMCs (Oil Marketing Company) to raise the price of petro products (petrol, diesel etc) overall inflation shall increase in India.

How actually rupee depreciates?

When in interbank foreign exchange market, there is access of a currency in comparison with another then the ‘currency in access’ depreciates.

This is according to the 'demand and supply' rule. When there is bulk supply of a particular vegetable in the market its price falls and in case of shortage price shoots up.
This means, in the interbank foreign exchange market presently there is abundance of Indian rupee and scarcity of US dollar.

Why there is scarcity of dollar? 

(1) Our oil marketing companies which imports crude oil from upstream companies abroad pay in dollar so they buy dollars from the market. For buying dollar they pay in rupee and therefore quantity of US dollar reduces from the market and Indian rupee increases.

(2) Same happens for the import of gold. India is the largest consumer of gold in the world. To reduce gold import Indian government hiked the import duty on gold.

(3) FIIs are drawing money from Indian capital markets. India's falling GDP growth, rising current account deficit and trade deficit, uncertainties over GAAR and policy flip flop are forcing FIIs to draw money from Indian capital markets.
FIIs take money in dollars and this again creates scarcity of dollar and rupee gets weaker.

(4) Debt crisis in Europe coupled with political uncertainties is forcing investors to invest in US treasury instruments. For this reason they are selling their investments in emerging countries like India and this money leaves India in dollars. Lesser dollar means weaker rupee.

(4) India's trade deficit and current account deficits are increasing. This means India is importing more than what it is exporting or simply put more outgoing dollars than incoming dollars.

(5) US dollar has not only appreciated against the Indian rupee but against Euro too.  Euro fell to 4-month low against the dollar. Because of this investors over the world are parking their funds in US dollar to benefit from its appreciation and thus resulting in the global scarcity of US dollar.

Scarcity of US dollar made dollar a strong currency and Rupee has been continuously depreciating against it.


Rahul Sharma said...

People keep blaiming UPA but people should look at what they are doing.

1. They are the ones who voted UPA.
2. They cheat in exams openly in Universities and Schools (I have seen it with my own eyes)
3. They cheat on property taxes (use cash to under declare property value to save stamp duty and capital gains)
4. Break traffic rules - and then pay off traffic cops

In our society nearly everyone does something wrong - any of the above. Hence it is a society of the corrupt, for the corrupt by the corrupt.

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